With UK interest rates residing at an all-time low and corporate funds willing to risk over the odds in the quest for higher returns on illiquid alternative investments, what once was a relatively acute investment phenomenon has quickly become a hotspot for a diverse range of institutional investors. However, as pressure on creditors mounts, the overextension of said credit has resulted in a rise in the level of outstanding debt and a decrease in the quality being issued. Given there are only so many bridges to be built and coal mines to be exploited, this saturated market bears an all too familiar resemblance to the pre-financial crisis securitisation market.
However, this dynamic shift in our investment strategy timely coincides with a change in our environmental conscious. The Paris Agreement and UK 2050 movement reflects a national and global desire to curb the effects of climate change which, although pose a disconcerting threat to our future, provides an opportune time to incorporate ESG into our illiquid investment decisions. To disregard such actions would unequivocally diminish investment returns, as witnessed by the re-insurance industry, who are among the first to face a fall in profits, predominately due to natural catastrophe claims across the US and Caribbean, directly attributable to climate change.
Given the extensive use of private debt and the impending implications of climate change, incorporating ESG decisions into the long-run illiquid investment strategy is now of growing relevance. Yet, within the industry we are seeing a large migration of talent towards the high-yielding private debt market with little being done to incorporate ESG strategy into these decisions. This, in part, is due to the ambiguity of non-traditional risk instilled within this approach. However, with the implementation of Investor Sustainability Disclosure rules by the European parliament under the EU Shareholder Rights Directive II, the quantitative implications of ESG on investment decisions will soon become more transparent. At this point it will be vital that funds incorporate ESG risk into their long-term investment strategy or face being left behind by their competition who were quicker off the mark.
Focusing on appointing managers with a proven track record amongst alternatives but who also have strong ESG credentials could be the most effective and appropriate first step for many institutions looking to incorporate sustainability into their illiquid portfolios. By doing so, institutions can only hope to mitigate the uncertainty that climate change will pose to their returns on long term investments in years to come.
Author:
Joe Mayer
To discuss this market in more detail and see how Plenum’s network in the space can be of use please contact:
joe.mayer@theplenumgroup.com
07903 567238